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Nobel Prize in Economics
Prescott, Kydland Win Nobel Prize in Economics
Oct. 11 (Bloomberg) -- Edward C. Prescott and Finn E. Kydland won this year's Nobel prize in economics for work that recognized the importance of productivity in business cycles and encouraged central banks to set long-term goals for fighting inflation.
Prescott, 63, a professor at Arizona State University in Tempe, and Kydland, 60, a Norwegian who teaches at Carnegie Mellon University in Pittsburgh and the University of California in Santa Barbara, will share a $1.4 million prize, said the Royal Swedish Academy of Sciences, which selects the winners. The men have collaborated since Prescott was Kydland's graduate adviser.
``Our styles are very different,'' Prescott said in an interview. ``I tend to go fast and make mistakes. He tends to go slowly and not make mistakes.''
The economists showed how collective decisions of consumers, businesses and policy makers result in expansions, recessions and recoveries, the Nobel citation said. Their work helped forecasters replace models that broke down in the 1970s amid oil shocks and simultaneous high inflation and unemployment.
``It's a very good choice,'' said Allan Meltzer, a Carnegie Mellon University economics professor who has written a history of the Federal Reserve. ``What they did in studying the business cycle has contributed to thinking about the framework we use today for economic forecasting models. Their work on central banks has changed the way we look at the Fed.''
Gary Stern, president of the Federal Reserve Bank of Minneapolis, where Prescott serves as an adviser, called the award ``a recognition that's well-deserved.''
The economists' findings prompted forecasters to pay more attention to technological innovation and productivity in predicting how the economy will perform, where previously they had looked mostly at the strength of demand as measured by consumer spending and fiscal stimulus, Stern said. The work had ``a profound impact,'' Stern said.
Prescott said he was delighted by the recognition. ``I love doing economics,'' he said in a telephone interview from his office in Tempe, Arizona. ``Things look so puzzling, but then you create order out of chaos.''
In the 1970s, Prescott said he tried to square what he was seeing in the economy with traditional models and found ``that it didn't work.'' He said he met Kydland when he served as the Norwegian's graduate adviser at Carnegie Mellon and the two have worked together ever since.
Kydland has lived and worked in the U.S. since his college days in the late 1960s. He was in Oslo when the award was announced and called the award ``fantastic'' in an interview with Norwegian public radio station NRK, saying it's ``the ultimate recognition'' for an economist.
Kydland was teaching at the Norwegian School of Economics and Business Administration when an assistant interrupted the lecture to inform him he won the prize, said Torsten Persson, chairman of the prize committee, at a press conference.
Kydland ``didn't want to end the lecture,'' he told NRK. ``The students clapped when I told them why we had to cancel.''
The two men are best known for a 1982 paper entitled, ``Time to Build and Aggregate Fluctuations,'' which established that business cycles stem from the economy's response to changes in investment and technology that affect the economy's productivity. Meltzer said that influenced the way forecasters constructed computer models for predicting fluctuations in the economy.
Prescott and Kydland also wrote a paper in 1977, entitled ``Rules vs. Discretion,'' that showed central banks should develop rules to help decide when to put aside their anti-inflation efforts in order to bolster economic growth. That formed the basis for later efforts to construct such policies.
The findings prompted central banks to keep the fight to contain inflation high on their agenda even if they decide to move temporarily to stimulate the economy, Stern said.
The Fed ``allowed inflation to accelerate'' in the late 1970s in an attempt to spur the economy, Stern said. Then-President Jimmy Carter named Paul Volcker to be come chairman of the Fed, which then set off a period of credit-tightening to help wring inflation out of the economy.
Stern said many central banks around the world now either set specific targets for inflation or, like the Fed, have adopted the goal of achieving price stability, which effectively commits them to holding inflation down.
``This was an easy decision -- they questioned conventional wisdom,'' Per Krusell, professor of economics at Princeton University and Stockholm University and a member of the Royal Swedish Academy of Science, said in an interview.
The academy said in a statement on its Web site that the two had ``transformed the theory of business cycles'' that laid the groundwork for modern econometric models.
``Models that had functioned quite well during the 1960s began to break down under the more turbulent economic conditions of the 1970s, with oil-price shocks and concurrent inflation and unemployment,'' the academy said. ``The laureates laid the groundwork for more robust models by regarding business cycles as the collective outcome of countless forward-looking decisions made by individual households and firms regarding consumption, investments, labor supply, etc. Kydland and Prescott's methods have been widely adopted in modern macroeconomics.''
Kydland received a bachelor's degree from the Norwegian School of Economics and Business Administration in 1968 and earned a doctorate from Carnegie Mellon in 1973.
Prescott, a native of Glen Falls, New York, received his bachelor's degree in mathematics from Swarthmore College in 1962, his master's degrees in operations research from Case-Western University in 1963 and his doctorate in economics from Carnegie Mellon in 1967, according to his Web site.
Alfred Nobel, the Swede who invented dynamite, established awards for achievements in physics, chemistry, medicine, peace and literature through his will in 1896. The economics prize, created by Sweden's central bank in 1968, was first awarded in 1969. Former winners include Milton Friedman and Paul Samuelson. The economics prize will be awarded formally at a ceremony in Stockholm on Dec. 10.
Last year, U.S. economics professors Robert F. Engle and Clive W. J. Granger won the prize for developing ways to improve economic forecasting and better predict volatility in financial markets, such as the events that led to the stock market crash of 1987.
Oct. 11 (Bloomberg) -- Edward C. Prescott and Finn E. Kydland won this year's Nobel prize in economics for work that recognized the importance of productivity in business cycles and encouraged central banks to set long-term goals for fighting inflation.
Prescott, 63, a professor at Arizona State University in Tempe, and Kydland, 60, a Norwegian who teaches at Carnegie Mellon University in Pittsburgh and the University of California in Santa Barbara, will share a $1.4 million prize, said the Royal Swedish Academy of Sciences, which selects the winners. The men have collaborated since Prescott was Kydland's graduate adviser.
``Our styles are very different,'' Prescott said in an interview. ``I tend to go fast and make mistakes. He tends to go slowly and not make mistakes.''
The economists showed how collective decisions of consumers, businesses and policy makers result in expansions, recessions and recoveries, the Nobel citation said. Their work helped forecasters replace models that broke down in the 1970s amid oil shocks and simultaneous high inflation and unemployment.
``It's a very good choice,'' said Allan Meltzer, a Carnegie Mellon University economics professor who has written a history of the Federal Reserve. ``What they did in studying the business cycle has contributed to thinking about the framework we use today for economic forecasting models. Their work on central banks has changed the way we look at the Fed.''
Gary Stern, president of the Federal Reserve Bank of Minneapolis, where Prescott serves as an adviser, called the award ``a recognition that's well-deserved.''
The economists' findings prompted forecasters to pay more attention to technological innovation and productivity in predicting how the economy will perform, where previously they had looked mostly at the strength of demand as measured by consumer spending and fiscal stimulus, Stern said. The work had ``a profound impact,'' Stern said.
Prescott said he was delighted by the recognition. ``I love doing economics,'' he said in a telephone interview from his office in Tempe, Arizona. ``Things look so puzzling, but then you create order out of chaos.''
In the 1970s, Prescott said he tried to square what he was seeing in the economy with traditional models and found ``that it didn't work.'' He said he met Kydland when he served as the Norwegian's graduate adviser at Carnegie Mellon and the two have worked together ever since.
Kydland has lived and worked in the U.S. since his college days in the late 1960s. He was in Oslo when the award was announced and called the award ``fantastic'' in an interview with Norwegian public radio station NRK, saying it's ``the ultimate recognition'' for an economist.
Kydland was teaching at the Norwegian School of Economics and Business Administration when an assistant interrupted the lecture to inform him he won the prize, said Torsten Persson, chairman of the prize committee, at a press conference.
Kydland ``didn't want to end the lecture,'' he told NRK. ``The students clapped when I told them why we had to cancel.''
The two men are best known for a 1982 paper entitled, ``Time to Build and Aggregate Fluctuations,'' which established that business cycles stem from the economy's response to changes in investment and technology that affect the economy's productivity. Meltzer said that influenced the way forecasters constructed computer models for predicting fluctuations in the economy.
Prescott and Kydland also wrote a paper in 1977, entitled ``Rules vs. Discretion,'' that showed central banks should develop rules to help decide when to put aside their anti-inflation efforts in order to bolster economic growth. That formed the basis for later efforts to construct such policies.
The findings prompted central banks to keep the fight to contain inflation high on their agenda even if they decide to move temporarily to stimulate the economy, Stern said.
The Fed ``allowed inflation to accelerate'' in the late 1970s in an attempt to spur the economy, Stern said. Then-President Jimmy Carter named Paul Volcker to be come chairman of the Fed, which then set off a period of credit-tightening to help wring inflation out of the economy.
Stern said many central banks around the world now either set specific targets for inflation or, like the Fed, have adopted the goal of achieving price stability, which effectively commits them to holding inflation down.
``This was an easy decision -- they questioned conventional wisdom,'' Per Krusell, professor of economics at Princeton University and Stockholm University and a member of the Royal Swedish Academy of Science, said in an interview.
The academy said in a statement on its Web site that the two had ``transformed the theory of business cycles'' that laid the groundwork for modern econometric models.
``Models that had functioned quite well during the 1960s began to break down under the more turbulent economic conditions of the 1970s, with oil-price shocks and concurrent inflation and unemployment,'' the academy said. ``The laureates laid the groundwork for more robust models by regarding business cycles as the collective outcome of countless forward-looking decisions made by individual households and firms regarding consumption, investments, labor supply, etc. Kydland and Prescott's methods have been widely adopted in modern macroeconomics.''
Kydland received a bachelor's degree from the Norwegian School of Economics and Business Administration in 1968 and earned a doctorate from Carnegie Mellon in 1973.
Prescott, a native of Glen Falls, New York, received his bachelor's degree in mathematics from Swarthmore College in 1962, his master's degrees in operations research from Case-Western University in 1963 and his doctorate in economics from Carnegie Mellon in 1967, according to his Web site.
Alfred Nobel, the Swede who invented dynamite, established awards for achievements in physics, chemistry, medicine, peace and literature through his will in 1896. The economics prize, created by Sweden's central bank in 1968, was first awarded in 1969. Former winners include Milton Friedman and Paul Samuelson. The economics prize will be awarded formally at a ceremony in Stockholm on Dec. 10.
Last year, U.S. economics professors Robert F. Engle and Clive W. J. Granger won the prize for developing ways to improve economic forecasting and better predict volatility in financial markets, such as the events that led to the stock market crash of 1987.